If an individual is considering bankruptcy, the most useful starting point is understanding how the process actually works. From obtaining information (knowledge), starting your protection and achieving a debt free status at the end of the process. Bankruptcy in Canada is not something you file on your own or complete through a general application. It is a formal legal process that must, by federal law, be administered by a licensed insolvency trustee under the Bankruptcy and Insolvency Act and the watchful eye of the Office of the Superintendent of Bankruptcy.
This structure exists to ensure that the process is handled consistently and fairly for everyone – you and the creditors.
Working with a bankruptcy process in Canada begins with understanding your financial position and determining whether bankruptcy is the appropriate solution based on your situation.
Step 1: Initial consultation and financial review
For any person questioning the best strategy to deal with their debt the easiest and most reliable way is to contact a Licensed Insolvency Trustee (“LIT”). Here are some straightforward reasons:
- The LIT is licensed by the Federal Government after they have completed several years of study and obtained practical experience. They are knowledgeable and must do their duty as professionals.
- The LIT must keep your discussion confidential.
- The LIT will help you understand all your relevant options.
- There is usually no charge or obligation (free) for this initial discussion.
The process begins with you giving the Licensed Insolvency trustee a picture of what you own, what you owe, household income and affordability (if any) to deal with your debts.
The purpose of this step is not to move directly into bankruptcy. It is to determine whether bankruptcy is appropriate or whether another option, such as a consumer proposal or other options may be more suitable. This is not a sales meeting. It is for information.
During this discussion, the trustee will explain how each option works and what the implications are. This provides you with an opportunity to make an informed decision based on your circumstances.
Step 2: Determining eligibility and suitability
Not every financial situation requires bankruptcy. In some cases, individuals have the ability to repay a portion of their debt over time, which may make another type of solution more appropriate.
Bankruptcy is generally considered when there is no reasonable path to repay debt within a structured timeframe. This may be due to the total amount of debt, limited income, or a combination of both.
The trustee will help you understand whether your situation meets the criteria and what outcomes you can expect under each option.
Step 3: Completing the required documentation
If you decide to proceed with bankruptcy protection the next step involves completing the required documentation. This includes a detailed statement of your financial affairs, which outlines your assets, liabilities, income, and expenses along with some other information.
Accuracy is important. The information provided forms the basis of the process and helps eliminate unpleasant surprises.
You will complete a formal meeting (which can be in-person or via video meeting) with a LIT and will swear an oath that the information provided is to the best of your ability complete and accurate. The protection of bankruptcy is only available to the honest but unfortunate debtor (which includes folk who overspent or had a failed business).
Once the documentation is completed and signed, it is filed by the trustee with the Office of the Superintendent of Bankruptcy on your behalf.
Step 4: Filing and immediate legal protection
Once your bankruptcy is filed, a legally enforceable stay of proceedings takes effect.
The stay of proceedings requires most creditors to stop collection activity (including court actions). This includes calls, legal actions, and in many cases wage garnishments. Creditors can apply to court to lift the stay of proceedings which usually only happens where you are accused of acting fraudulently or the debt is one of those that can survive a bankruptcy.
For individuals dealing with ongoing creditor pressure, this step provides immediate relief and creates a more stable environment moving forward.
If you are currently facing collection activity, speaking with a licensed insolvency trustee in Toronto or a licensed insolvency trustee in Alberta can help you understand how this protection can apply in your case.
Step 5: Responsibilities during bankruptcy
Bankruptcy is not simply a filing. It is a process that includes certain responsibilities over a defined period of time.
These responsibilities include:
- Reporting your monthly income and expenses
- Telling the truth and making full disclosure
- Making payments if required based on income levels
- Attending financial counselling sessions
- Providing any additional information requested by the trustee (including for tax filings).
A goal of these steps is to ensure transparency and to support your financial recovery moving forward.
Step 6: What happens to my income while I am in bankruptcy?
In some cases, individuals are required to make additional payments during bankruptcy based on their income and household circumstances. This is referred to as surplus income contribution requirements.
The amount is calculated using a government set formula that take into account household size and income levels. There are special reductions if you have to make payments such as family support obligations, health / medical expenses not covered by insurance or payments towards unforgivable debts (such as court-imposed fines). If your income exceeds a certain threshold, a portion is contributed toward your estate during the bankruptcy period.
This is something the trustee will explain clearly during your initial consultation so that you understand how it applies to your situation.
Step 7: How long does my bankruptcy last? And Discharge from bankruptcy
This is when your bankruptcy is completed and eligible unsecured debts are legally eliminated.
If this is your first bankruptcy it can be over in 9 months (or 21 months if you have to make surplus income contributions).
If this is your second bankruptcy it can be over in 24 months (or 36 months if you have to make surplus income contributions).
Unless your discharge from bankruptcy is opposed – in which case it is longer.
If there is no opposition to your discharge the LIT can sign your certificate of discharge releasing you from your debts. If there is an opposition then the trustee must request that the court considers your discharge application, make recommendations to the court and the court will decide the terms of your discharge from bankruptcy.
Sometimes the opposition is not due to your actions or inactions (e.g. rules under the Act such as your income tax debts exceed $200,000 and are more than 75% of your total debts).
Having the court involved in your discharge is manageable but can bring delays.
Once discharged, you are no longer responsible for the unsecured debts included in the bankruptcy.
What happens to your assets
One of the most common urban myths about bankruptcy relates to assets such as your home, vehicle, life insurance policies and retirement funds (pensions, RRSPs).
Every province sets exemption levels for different classes of assets. These are well beyond the scope of this article so please see a Licensed Insolvency Trustee for details. To be exempt the asset must meet all the criteria set out in that Province’s law and must be valued at less than any limits set.
If your asset is not fully exempt the LIT must ensure that either you pay the fair value to keep it (terms can be negotiated with the LIT) or surrendered to the Lit so he / she can sell it.
This is not a one size fits all outcome. The specifics depend on your individual financial situation and location. A trustee will review this with you in detail so that you understand how your assets would be treated before any decision is made.
What happens to my Income tax refunds and government credits?
Any income tax refunds for any period up to the date of your bankruptcy will first be offset against tax debts owed to the CRA and then, if there are still refunds owed, these go to the trustee for the general benefit of your creditors.
A tax refund for the portion of the year from the date of bankruptcy until the end of that tax year will go to the trustee for the general benefit of your creditors.
Child Tax Benefit credits generally are not impacted by the bankruptcy filing.
HST credits will generally be sent to the Trustee but can be refunded to you at a later date if your bankruptcy already recovered sufficient other funds to cause the basic costs of bankruptcy to be covered.
There are many other types of credits – please speak to a LIT case-by-case.
What happens to your credit
Bankruptcy does have an impact on your credit profile. However, it is important to consider your starting point. If you are already missing payments or carrying high levels of debt, your credit is likely already negatively affected or soon to be very low due to an inability to pay all debts on time and reduce debt levels. In simple terms “you cannot kill what is already dead”.
What you can control is using the fresh start provided by the bankruptcy to rebuild your credit. This does take time but there are proven, legitimate steps your LIT will explain to you – and these can be started on shortly after your bankruptcy is filed.
Even while in a bankruptcy it is possible to do financial things like financing a vehicle; renewing a mortgage that has been kept in good standing, apply for student loans, etc.
After discharge, many individuals begin rebuilding their credit through responsible use of financial products designed for that purpose.
Common misconceptions about bankruptcy
There are several misconceptions that often prevent people from exploring bankruptcy as an option.
One is that bankruptcy is permanent. In reality, it is a defined process with a clear end point.
Another is that you will lose everything. As noted earlier, asset treatment depends on specific circumstances and exemptions.
A third is that bankruptcy is the only option once financial difficulty reaches a certain level. In many cases, alternatives such as consumer proposals are available and may be more appropriate.
Another is “who will find out”? Bankruptcy does not require a newspaper advertisement unless the person had assets over the threshold (currently $15,000) at liquidation value. Generally, only your creditors (who you want to tell so they leave you alone), the Federal Government who issues the certificate that starts your bankruptcy protection, CRA and anyone else you want to inform. Looked at another way, if you have unmanageable debt and do nothing (like do not seek bankruptcy protection) then everyone finds out – your bank and workplace when the creditor gets the right to seize your bank account or garnishee your wages; your household when collectors call; the references you may have given on credit applications; etc.).
Understanding these distinctions helps you evaluate bankruptcy as one option among several, rather than as a default outcome.
When it makes sense to explore bankruptcy
Bankruptcy becomes relevant when repayment is no longer feasible and when other options are not suitable.
This may include situations where:
- Debt levels are significantly higher than income and assets you are able and willing to sell at a profit
- There is no realistic path to repay debt within a reasonable timeframe
- Consolidation loans are not available or not affordable
- Collection activity is ongoing and escalating
- Other solutions have been explored and are not viable
If these conditions apply, it may be appropriate to understand how bankruptcy would work in your situation.
A structured and regulated process
Bankruptcy in Canada is designed to provide a fair and consistent framework for resolving debt. It is regulated, transparent, and administered by licensed professionals.
The process is formal, and it is not something you are allowed to navigate alone. Every step is guided by a licensed insolvency trustee to ensure that it is handled correctly.
Speak with a professional to understand your options
If you are considering bankruptcy, the most practical next step is to speak with a licensed insolvency trustee and understand how the process would apply to your situation.
Baigel Corp works with individuals across Ontario and Alberta to provide clear, confidential guidance on bankruptcy and alternative solutions. There is no cost to have an initial consultation and no obligation to proceed.
If you are looking for clarity, speaking with a licensed insolvency trustee can help you understand what comes next. Visit www.baigel.ca
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee